Having a positive cash flow is 100% vital to your long term financial prosperity.
The amount of money that goes in and out of your bank account each month determines quite a bit about:
- How you live
- How you spend
- How you save
- What you drive
- Where you live
- What you eat (And so on)
If you don't think mastering your cash flow and making sure you have a positive cash flow is vital, just look at companies like K-Mart and Sears. In 2007 Sears, who happens to own K-Mart, saw their stocks being traded at $137.
Fast forward to today and their stock is now worth .30 cents.
Their cash flow stopped coming in with the emergence of e-commerce, but their outgo each year was still through the roof trying to keep afloat stores and an outdated business model across the country.
Their cash flow was not positive… it was upside down.
Understanding Positive Cash Flow 101:
Typically the term cash flow is a word reserved for business organizations, (So it is OK if right now you might be asking yourself this question, “Why is knowing if my cash flow is positive necessary to my finances?).
To help you understand the answer to that question, let's take a step back in history and visit ancient Mesopotamia…
Try your best to imagine the ancient Mesopotamian people gathering water for their crops and personal use… with buckets.
How long do you think it took them to realize that using buckets to fetch water a few miles away from the village was a waste of their time?
Eventually, they got smart and use a series of trenches and irrigation systems to bring the water to them. Now replace water with cash and replace buckets with work.
Chances are you're going to work to fetch some cash, but have you mastered your money and taken control of your cash? Is your cash flow positive?
Is your cash flow being put to work, like digging a canal system, or is your cash evading you each month (AKA you're spending it all)?
In other words, are you in the black or red at the end of each month…?
What is cash flow anyways?
As mentioned earlier, cash flow is a term that is associated with business. Cash flow refers to the amount of cash, or money, that flows in and out of a business account each month.
In accounting terms, cash flow is the difference in the amount of cash available at the beginning of a period (opening balance) and the amount available (or lack of) at the end of that period (closing balance), per Business Dictionary.
For you and me, cash flow is the amount of money that comes into our account each month, what leaves, and what is ultimately leftover!
Why does knowing your cash flow matter to you?
Answer this question to yourself really quickly:
At the end of each month, are you red or black?
Put another way, when you get done paying bills and spending your money you worked for, do you have some leftover (Black) or are you tapped out (Red)?
Your cash flow has a large impact on your ability to:
- Pay off debt quicker
- Create investments that compound
- Save money
- Buy big-ticket items like homes
- Buy real estate
While cash flow is typically a word that is reserved for businesses, knowing and mastering your cash flow is key to your own financial prosperity.
It is why one the go-to recommendation for assessing your finances is to:
Treat your own bank account like a business would.
Not only does knowing whether or not you have a positive cash flow have an impact on how you live, but it also creates more financial awareness.
Are you working hard to pay bills, or are you aware of things like your real hourly wage and your monthly expenditures?
What do you have to show for your hard work?
The truth about knowing your cash flow is that it can actually be misleading.
Hence why knowing if you have a positive cash flow is vital. Vital to your networth, your family, your future!
You might be someone who makes a lot of money… but you also spend most of it. Therefore your cash flowing in might be high, but it isn't necessarily positive at the end of the month!
Sometimes this phenomenon is referred to has lifestyle inflation or lifestyle creep. While the granite countertops are certainly nice in that luxury condo, the Formica counters in the basic model outside the city also come in gray.
Knowing whether you have a positive cash flow or not can help you make better long term financial decisions. Perhaps you're someone who makes a six-figure income and you're in your early 30's.
Does your networth match your annual salary (Which is recommended to have saved by age 30)?
If not, you might not only have a little lifestyle inflation going on, you might also have quite a bit of cash flow escaping each month!
In order to figure out how to improve your postive cash flow (Or make it positive in the first place), you must first figure out what your cash flow is each month!
How to quickly figure out your monthly cash flow:
Figuring out whether you have a positive cash flow or not complicated, just follow these steps:
- Grab your bank statements from last month
- Figure out how much you BROUGHT home, aka your NET income.
- Figure out how much you spent. (You can categorize fixed and variable expenses to getter a more accurate picture of spending)
- Figure out what went to debt
- Subtract all spending, including debt payments from your net income.
- Do not factor money going to savings or investments (Unless fixed)
- The leftover amount, either black or red, is your cash flow.
Once you have your monthly cash flow number (If you want to have an accurate number, do this for three months and find your average), go ahead and multiply it by 12.
For example, let's say your positive cash flow is $700 per month X 12 = $8,400 per year. You would have an annual positive cash flow of $8,400.
Now that you have your cash flow number, here are some tips to help you increase your positive monthly cash flow!
5 Ways to Create Positive Cash Flow
1. Pay Off Debt
This might seem like a “Duh” moment, but it is essential to positive cash flow. The month we paid off both cars and my student loan, we increased our cash flow by $900.
That meant we had $900 every month to do whatever we wanted. As you pay off debt, either using the debt snowball or debt avalanche, you are increasing your cash flow.
A huge chunk of cash flow actually sits in cars. While a 2% interest rate sounds great for car owners, however, cars eat up cash flow.
With the average payment of $400, or an extra $4800 a year, the cash flow from being auto loan free is amazing.
Cashflow just means more options. Even in 2019, liquefiable income is still king, aka cash!
Related: Pay Off Debt Fast Guide
2. Cut Back Spending
Slashing high spending categories, adjust memberships, and kangaroo onto someone else's Netflix account.
Just by reducing eating out, entertainment budgets, cutting out a gym membership and cable an individual can increase their positive monthly income by the hundreds.
Cutting extra spending can also help with completing #1.
See Also, 17 Tips to Slash Spending
3. Refinance High Interest Debt
A quick way to increase your cash flow is to refinance bad debt with interest rates.
A student loan with an 8% interest rate or higher when refinanced can help increase your monthly cash flow. This allows you to then choose where your newly freed up money to go.
Refinancing is not black and white, so when considering student loan refinancing, be sure you are aware of the pros and cons.
4. Track Your Spending
Awarness is key to creating a postive monthly cash flow!
Whether you use Mint, Personal Capital, or an old school Excel spreadsheet, you will have to track your money.
Statistically speaking, roughly 60% of people don’t track their income or monthly outgo. This is alarming for many reasons.
But knowing where your money is going is key to making sure you have a monthly income. Feel free to use my exclusive link to Personal Capital if you are looking for a great tracking app.
5. Focus on Making More Money
So let’s say you track your spending, you paid off your debt, and you cut back on spending, but you still are having trouble creating a positive monthly income of at least $1,000.
Then you need to focus some energy towards making money. For you that may mean something different, but for starters here are a few ways to make extra income:
Cash Flow Takeaway:
What would a positive cash flow of $1,000 a month do for you? How about $2,000?
For many, it is complete game changer to have $1,000 worth of discretionary income. With roughly 8 in 10 people living pay check to paycheck, $1,000 can help fatten emergency funds, put more money towards debt and even let you travel more often!
While focusing on creating a postive monthly cash flow might not be “Fun” or thrilling, it is vital to making sure long term you're financially secure!
Q: How much cash flow do you have left over at the end of the month?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! I got serious with money when I used Personal Capital to track my finances.